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Economics of Technology

theophilusmobb

April 30, 2024

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Economics of Technology

1. Introduction

Economic analysis in healthcare often looks into the peculiar market structure and public-private mix of this so-called industry. Therefore, the field of health economics often involves addressing issues with the application of general economic theory.

Economics has addressed the issue of resource allocation and welfare implications under a wide variety of contexts. Therefore, we can say that economics is a general theory of practical rational conduct under conditions of scarcity. The field of agricultural economics, for example, studies economic behavior in the context of agricultural problems. This specialization recognizes that production and consumption decisions in agriculture are different from those in other sectors, and the allocation of agricultural resources has special significance for many poorer countries.

Economic activity involves using resources in such a way as to get the most satisfaction for the available means. Using resources in the best way involves both technical efficiency (producing goods or services using the fewest possible resources) and allocative efficiency (producing the combination of goods that provides the most welfare for society, when welfare is defined in terms of subjective personal utility).

1.1. What is Economics of Technology? Economics is a social science that studies human behavior, which aims at satisfying the wants of people for goods and services. These wants are unlimited, in the sense that people always want something more and better. This is a fundamental and timeless economic problem, not just a modern-day phenomenon. Every generation goes through a period of change and seeks improvement.

Introduction to Economics of Technology

2. Impact of Technology on Economic Growth

This leads to the estimation of an augmented neoclassical production function for the rate of growth of product per unit of labour.

Statistically, the above results are either equalities (and therefore tautologies) or, given the data F and derived yields, an estimate of F -1/2 A. This will prove to be an important point when it comes to estimating the growth rate of relative to the level of technology. Step differencing (e.g. year-on-year differences in employment and capital) will not provide an estimate of the growth rate of technology – a moving regression is required to estimate it is the coefficient on A in a regression of (y F)^2 on its lagged values. The subscript i representing firm is dropped for tractability, so that we have the regression (1)-(2), where ( Ayt)^2 => ()() )()+

(y F)^2 = (1/ A^2) (F . F) = (1 / A^2) ( F1(K,L)^2 + F2(K,L)^2 + F3(K,L)^2 ) (where the right hand side).

Dropping subscripts, this can be written as y F – where F is the vector of marginal rates of return to capital and labour at the levels of inputs. Take the dot product of both sides with itself and rearranging yields:

d(yt/Al)/dt = F1(Kt, Lt) + F2(Kt, Lt) dKt/dt + F3(Kt, Lt) dLt/dt

= F1(Kt, Lt) + F2(Kt, Lt) (If/A) + F3(Kt, Lt) (Nt/A)

Let A be a scalar, which represents the level of technology. The production possibility frontier of the firm at time t is given by yt F(Kt, Lt), where Kt and Lt are the quantities of capital and labour. Multiplying yt through by A/Al and letting Kt=It and sLt=Nt yields the production function in terms of per efficiency unit of labour. Differentiate this and we have a rate of growth of product per efficiency unit of labour, which is given by a time derivative:

Many existing growth models are hard to link to empirical work on economic growth and technological change. A theory which is well defined at the microeconomic level is needed to guide the specification of the empirical model and to interpret results. Consequently, we focus on the firm-level model of the impact of technology on the rate of growth of total factor productivity, which has been developed by the authors in previous work.

The meaningful discussion in the subject area requires an understanding of what the authors mean by technology. Because economic growth depends on so many variables, the theory which underlies the estimation of the impact of technology is important. Theories which cannot explain the relationship between technology and the rate of economic growth absorb technology into an aggregate production function, which is a very unsatisfactory way of looking at the world. To avoid this, we use a theory which is based on microeconomic foundations and traces the impact of technology on the rate of growth of total factor productivity. The aim is to use this theory to guide the empirical work.

3. The Role of Innovation in Technological Economics

Another element of innovation which can affect firms’ behavior in the market and the level of technological activity is the use of new technology as a competitive edge. This can lead to the spillover of rivalry between firms in the development and sales of new techniques and products. Sustained increase in the development of technology across all industries will serve to push out old methods with new ones, price today substitution of products for their predecessors and processes. Like this, the process represents a change in consumer and producer surplus and is essentially a movement of the equilibrium of industries due to the height in expected profits from newer methods.

Often, the main work involved in trying to understand the economic implications of innovation revolves around the examination of the behavior of firms in their efforts to increase the level of global innovation. The key to innovation maps out a sequence of events which begins with an increase in a firm’s expected value from adopting a new technology. This will lead to an increase in the expected profits from development and, in turn, an increase in the importance and resources dedicated to R&D. As the marginal cost of the technology increases due to increasing complexity, around the optimal point in the development of the technology, this will be reflected by the choice to use another firm’s technology, whereby a set of expected profits for different costs could lead to a price negotiation over the technology with the possibility of a joint venture into its development.

Innovation often represents the most ambiguous aspect of production in technology. It lies at the point of juncture between the application of science and the creation of new products, processes, or systems. Innovation forms a crucial part of the history of economic development, advancing standards of living by creating, among other things, new products and services, new jobs, new industries, and even new forms of industrial organization. But innovation is not synonymous with technological advancements. Indeed, it can be seen as a process beginning with an invention or the first instance of a new technology and ending with its successful implementation in the form of new products or processes. Primarily, this occurs through a learning-by-doing process during which knowledge is put into practice and improved upon until it becomes embodied in a cost-effective method. Due to this element of risk and uncertainty, and potential rewards, innovation can be a costly process, and it is generally undertaken by firms with the expectation that it will lead to future profitability.

4. Challenges and Opportunities in the Economics of Technology

The challenges of technology build upon the theme of uncertainty. A common notion is that it is difficult to predict the welfare and distributional effects of a new technology. This is because technologies are often combined, making it difficult to isolate the effect of a single technology. Consider the car; its introduction had major effects on other industries such as oil, steel, and rubber. Moreover, technologies can be complementary. Electric lighting increased the demand for electricity. It also displaced gas lighting, despite the fact that there were many areas in the UK where the price of gas and gas lighting had already fallen and the efficiency of gas lighting was still increasing. This led to a slow diffusion of electric lighting as it only became price competitive with gas lighting in the 1920s. Reversal of unwanted technologies is also costly in the presence of sunk costs. Take, for example, the recent foot and mouth epidemic in the UK. It is believed that the disease was introduced due to the illegal feeding of food waste to pigs in order to reduce costs and increase profit margins. Although this practice is now banned, it presents a sunk cost – an investment in machinery and techniques – to pork farmers and cheap food waste disposal may remain an attractive option. The practice may well continue and lead to another foot and mouth epidemic in the future.

5. Future Trends in the Economics of Technology

The future promises to bring significant changes and challenges to the economics of technology. Although the ultimate payoffs are not known, it is not too difficult to predict the nature of some of the problems to be faced. As the costs of copying and transporting many forms of information with the aid of computers and other information technology fall, traditional boundaries separating industries and markets will become less and less meaningful. Information will flow more freely between different parts of the economy. In many cases, this will be beneficial, leading to the breaking down of monopolies in service industries and diminishing price discrimination in markets for products like airline tickets. When it costs little to move information, consumers’ search costs will be lower and they will be more able to take advantage of price differences. Computerized reservation systems and the ability to send consumer preferences down a telephone line to a powerful computer hundreds of miles away can be both substitutes and complements for various goods and services. They have the power to revolutionize the existing structure of many markets. This can lead to increased competition and efficiency, but can also bring with it problems of market instability and decreased variety as described in the previous section.

A second major trend is the blurring of distinctions between information and other forms of economic activity. As more goods and services are imbued with information technology, the markets for these goods become more similar to information markets, and the methods of production and distribution of the various goods become more alike. Take, for example, the modern car which, unlike its predecessors, contains a large amount of computer hardware and software. This trend may lead to less dichotomous thinking between information and other sectors, and among the positive outcomes could once again be increased efficiency due to the ability to apply the same methods used in information markets to other sectors. However, it can also lead to increased exposure of many industries to the problems of excessive competition and rapid price deflation that have traditionally plagued information markets.